In most cases, the answer is no -- but not in every case.
A subprime mortgage loan is a mortgage loan made to borrowers who don't qualify for a loan at a competitive interest rate. The interest rates with a subprime loan are usually very high, which can make borrowing much more expensive.
In most cases, it does not make sense to take out a subprime mortgage loan. But that doesn't mean you should never borrow with this type of debt.
The key is to explore all your alternatives first. And if a subprime mortgage is your only option, you'll need to make a careful assessment of whether borrowing this way is worth it.
There are plenty of alternatives to subprime loan options
Borrowers with low credit scores shouldn't assume they're automatically relegated to subprime loans only. In fact, there are options available for people who want to get a mortgage with bad credit.
Government-backed loans, including FHA, USDA, and VA loans can all be great choices for those without stellar credit, as they tend to have more relaxed qualifying requirements while still offering reasonable interest rates. In fact, FHA loans are available with credit scores as low as 500 if you make a 10% down payment. Meanwhile, USDA loans and VA loans don't have any minimum credit score requirements.
Before you even consider a subprime loan, you should find out if any of these other loan types will work for you.
A subprime loan may be worth considering in specific circumstances
If, for some reason, you can't find an alternative to a subprime loan, there are a few specific conditions that should be met in order for it to make sense to still borrow. Specifically:
- Make sure you understand how your loan works, how much the monthly payments are, what the total cost is, and whether payments could go up over the life of the loan.
- Make sure your monthly payments are easily affordable. If you have any doubts about your ability to pay the mortgage at any time during the repayment process, don't take a subprime loan.
- Try to work on a plan to improve your credit and finances. Ideally, your goal should be to refinance as quickly as possible into a loan with a more competitive rate.
If all of these things are true and you can't wait to buy a property, then you may decide paying the higher interest rates associated with a subprime loan is worth it.
When possible, though, you should focus on improving your credit and income so you can become a more competitive borrower -- and then buy a home. That may mean having to wait a little while, but it may be worth it, especially if you can save a lot of money in the long run.
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